Overshadowed by
the pathetic drama gushing forth from the ailing financial stocks
these days, other markets have slipped out of the limelight. In
particular commodities, a market-darling sector not too many months
ago, have been all but forgotten. This lack of attention is masking
great opportunities.

In commodities’
case, it is not only the newfound center-of-the-universe status of
financial stocks that has shifted investors’ focus away. Starting
in early July, commodities entered a steep correction. Wall Street,
perpetually hating commodities because they compete with the stock
markets for capital, gleefully pounced on this event and brazenly
declared that commodities were dead. Commodities sentiment turned
negative.

Fear fed on itself
and selling intensified, culminating in the biggest correction yet
witnessed in this entire commodities bull. Although nothing
fundamental changed during these downward-spiraling 2.5 months, many
traders came to believe Wall Street’s assertions that the
commodities bull was over. But happily for investors, commodities
cycles strongly suggest otherwise.

All trending
markets, even the biggest and longest secular bulls, flow and ebb
over time. Commodities are no exception. Powerful uplegs climb
until popular greed grows too extreme. Then they suddenly yield to
steep corrections which stoke popular fear. These persist until
fear gets out of control and everyone is very discouraged. Then
like a phoenix arising from the ashes, this whole cycle begins anew.

Prudent investors
and speculators seek to add new long positions late in these
periodic ebbings, when probabilities highly favor a correction
bottoming. Buying when few others want to and nearly everyone
thinks a sector is doomed is certainly not easy psychologically.
But as all contrarians know it is absolutely necessary to fight the
crowd and buy deep-out-of-favor sectors to ultimately reap the
greatest profits.

Odds are now
is such a time in commodities, a fantastic buying opportunity likely
to be overlooked by all but the most-disciplined contrarian
traders. As the charts in this essay reveal, the technicals for
commodities as a group are very favorable for spawning the next
major upleg. In this study of bull-to-date commodities cycles, I
used the Continuous Commodity Index as my general-commodities
benchmark.

If you are not
familiar with this CCI, some background is in order. Wall Street
uses the venerable CRB Index as its commodities metric of choice.
Launched in 1957, it has a long and storied history. The problem is
what is called the CRB today is
not comparable
to the historical CRB. In July 2005 the classic CRB was
radically revised
when its traditional equal weightings and geometric averaging were
cast aside.

Today’s CRB is a
totally new index utterly
dominated by oil.
It is only relevant back to its mid-2005 birth. While it was
technically the tenth revision of the CRB, in reality it is nothing
at all like the historical CRB. Thankfully the classic
ninth-revision CRB lives on today in the form of the Continuous
Commodity Index. Thus the CCI is the only legitimate and honest way
to measure commodities’ progress across that massive mid-2005
discontinuity.

Although all my
analysis here is based off the perfectly-comparable CCI, I rendered
the 10th-rev CRB on these charts as well to highlight the vast
differences. Anyone trying to understand this commodities bull in
context through the lens of today’s CRB will be woefully
misinformed. The CRB is rendered in blue while the CCI, the true
extension of the historical ninth-rev CRB, is rendered in red.

From early July to
mid-September, the CCI plunged 26.4%! This latest correction was
indeed swift and brutal, the biggest and meanest witnessed in this
entire commodities bull by far. Since a decline of this magnitude
is unprecedented, it is easy to understand why commodities sentiment
is so bad. And it is easy to see why Wall Street has fertile ground
for sowing its old commodities-are-dead thesis.

As always though,
it is foolish to consider recent events out of secular context.
This newest correction in the CCI was certainly not the first we’ve
weathered in this bull. Depending on how you want to carve up major
CCI uplegs and corrections, it was actually about the sixth.
And just as the five major corrections that went before it failed to
slay this bull, odds are the sixth is not going to prove any more
successful.

Looking at the
blue ninth-rev CRB line until mid-2005 and its true extension as the
red CCI line afterwards, commodities have clearly flowed and ebbed.
Prior to the latest upleg, on average the CCI tended to gain 27.4%
over 12.0 months in each of its previous five major uplegs. This
may not seem like much, but remember it is in a very conservative
geometrically-averaged index of 17 equally-weighted commodities.
Many key individual commodities, like gold and oil, rallied far
greater than the benchmark CCI.

As in all bulls,
major corrections followed each of these major uplegs like
clockwork. The five major corrections before our latest in recent
months averaged losses of 8.1% over 1.9 months each. Note the
asymmetry. Not only were the corrections much milder than their
preceding uplegs, but they occurred over much less time than their
preceding uplegs. This asymmetry is typical because the fear
driving corrections flares up much faster than the greed driving
uplegs.

Most investors, as
long as they weren’t confused by Wall Street’s CRB propaganda which
falsely showed
a failing bull in recent years, were totally happy with commodities’
progress as of late 2007. Like all bulls commodities would surge in
uplegs and then retreat in corrections. But the uplegs were much
larger, and lasted much longer, than the corrections. So
commodities were nicely trending higher on balance.

Then the CCI’s
sixth major upleg was stealthily born in August 2007. Commodities
are usually weak in late summer as you can see in this chart. 2008
was not an anomaly in that regard. For the first five months of
this new upleg, the CCI’s progress was fairly normal. It didn’t
reach its previous uplegs’ average 27.4% gain until early February
2008. To that point this upleg was a bit faster than usual, but not
larger.

Then something
remarkable happened. For the first time in history, crude oil broke
decisively above $100. Whether they’re interested in commodities
investing or not, everyone watches oil since it is so critical to
our global economy. These surging oil prices, coupled with weak
stock markets entering
a new cyclical
bear, drove growing interest in commodities. Hedge funds, tired
of stock losses, started really buying commodities.

Thus in February
2008, for the first time in this bull, commodities as a group
started soaring vertically. In a single month the CCI rocketed
14.3% higher! This is a staggering move for an
equally-weighted geometrically-smoothed index. The only other
remotely comparable time was the February-March 2005 spike capping
the third upleg when the ninth-rev CRB soared 11.7% in one month.

But while
commodities corrected right after their early-2005 surge, they were
off to the races in early 2008. The crisis in financial stocks was
getting worse and the general stock markets were grinding sideways
to lower. So big speculators including hedge funds dumped their
capital into commodities, really the only sector that was working.
All this capital flooding in drove the CCI even higher.

This was really
exciting for long-time commodities investors as it was the first
time in this entire bull that mainstream investors started getting
interested in commodities. The higher oil climbed, the more traders
took their first serious looks at the commodities sector. Long a
contrarian-only realm, this sixth upleg was a milestone as it marked
the initial vanguard of mainstream involvement.

This is very
encouraging because secular bulls generally don’t end until the
general public is totally convinced that a bull market will
accelerate higher into perpetuity. Think about the tech-stock
mania of early 2000 when all anyone talked about, even average folks
on the street, was the New Era of technology and the untold riches
to be won. It takes years, and many uplegs, between the initial
signs of mainstream involvement and the ultimate apex when a sector
becomes the most popular and loved on the planet.

The hedge funds
finally awakening to the great opportunities in this commodities
bull drove the biggest CCI upleg we’ve seen yet. Over 10.5 months
the CCI soared 54.4% higher. It was awesome! In terms of duration,
this wasn’t too much shorter than the 12.0-month average of the
preceding five uplegs. But in terms of magnitude it was twice as
big as the 27.4% average upleg gain prior to that time.

At that
bull-to-date high in early July 2008, the CCI had soared 235.0%
higher since October 2001. This is not only impressive in an
absolute sense, but it is incredible for an equally-weighted
geometrically-averaged index. And realize some of its 17 component
commodities, like orange juice, are not popular and weighed this
index down. The gains in headline commodities over this period were
awesome.

And over this
identical seven-year span of time to the very day, the S&P 500 only
climbed 16.3%. Commodities were a vastly better investment, over an
order of magnitude better, than general stocks over the last seven
years. Yet today Wall Street still hypes the stock markets
endlessly and continues to aggressively try and hide the powerful
bull market in commodities from the eyes of bleeding mainstream
investors.

But no matter how
big the sixth major CCI upleg was, like all uplegs it had to be
followed by a correction. All bulls flow and ebb to rebalance
popular sentiment. And not only are corrections asymmetrically
faster and sharper than their preceding uplegs, but they tend to be
of similar magnitudes. While a small upleg usually leads to a small
correction, big uplegs spawn big corrections. So it is not
surprising that after the largest upleg of this bull by far we just
witnessed its largest correction as well.

A 26.4% decline in
just 2.5 months is indeed steep and scary. While the duration isn’t
too far beyond the 1.9-month average of the preceding major
corrections, the magnitude vastly exceeded the 8.1% average.
Instead of giving back about a third of its preceding upleg’s gains
in line with bull averages, it took back about half. It certainly
did its job, of crushing greed and igniting the flames of fear,
exceedingly well.

Following this
uncharacteristically-sharp CCI decline, commodities investors are
scared. They are looking for anything they can to justify their
fears. As always late in corrections, all kinds of theses arguing
why this commodities bull has to be over are gaining
popularity. News always gains prominence that justifies whatever
traders want to think. Any contrary news is ignored. This is why
newsflow at major tops is always exceedingly bullish and newsflow at
major bottoms is exceedingly bearish.

Be careful though,
as only fundamentals will end this bull. Not until the world
is able to consistently produce more commodities than it consumes
will commodities start grinding lower in their next secular bear.
We are still many years away from universal commodities surpluses.
Oil, the king of commodities, is the best example. Demand growth is
soaring in a thirsty world. Yet existing oilfields are depleting
and major new finds have become exceedingly rare despite record
levels of capital spent on exploration.

Without global
surpluses, this bull isn’t over by a long shot. And interestingly
the CCI’s secular technicals support this. Even at its worst close
in mid-September, the CCI was only at a 9.5-month low. It is kind
of silly to run around like Chicken Little proclaiming the sky is
falling when the CCI only retreated to October-2007 levels. No one
thought commodities were doomed then!

In addition, much
has been made of the CRB’s secular uptrend. As you can see above it
was very tight between 2002 and 2006. Once the old CRB was scrapped
for the brand-new unrelated tenth-revision version, it fell out of
this uptrend and spooked many investors into capitulating. Just
like in recent weeks, back in late summer 2006 Wall Street eagerly
declared commodities dead. Even some prominent contrarian
commentators bought into this nonsense, much to their subsequent
shame.

Meanwhile the real
ninth-rev CRB, now in the form of the CCI, was breaking above
resistance in mid-2006. The CRB’s original secular resistance line
became support in late 2006 and 2007. Provocatively, as of
mid-September 2008 the CCI wasn’t even back down to resistance yet
(say 440) let alone secular support (about 400). No competent
technically-oriented trader would even think about declaring a bull
dead before its long-term support lines decisively failed! The CCI
is doing just fine technically.

This next chart
zooms in to the last several years or so to get better resolution on
recent events. In addition to showing the growing gap between the
CCI and what is falsely-called the CRB today, it shows how
impressive commodities remain technically. The CCI may have given
back its sharp speculative spike driven by the hedge-fund mainstream
vanguard earlier this year, but the vast majority of its bull gains
remain intact.

At 450 on the CCI
last autumn, commodities investors were thrilled with these
bull highs. The future for commodities as an investment had never
looked brighter. Then the sixth commodities upleg evolved into a
speculative spike as hedge-fund capital chased the only market
sector that was really performing. Greed eventually got excessive,
the spike collapsed, and the CCI returned to those same 450 levels
last week.

And this
deeply-oversold 450 level persisted for exactly one trading day, an
anomaly. Within four trading days the CCI had already rocketed 9.6%
off its correction low! Hovering around 500 on the CCI this week,
it is hard to believe anyone armed with a chart showing more than a
few months of data is the least bit concerned that this bull is
over. Today’s levels remain very impressive from any reasonable
perspective.

Provocatively this
isn’t the case for the new oil-dominated CRB. At worst in
mid-September it was back down to levels first seen in January
2006. And it is well below the ninth-rev CRB’s secular support
again. Even though this perspective is incredibly misleading given
the radical CRB revision in mid-2005, I can’t count the number of
times I’ve seen Wall Street technicians try to build a bearish
secular case with it lately.

The CRB isn’t
comparable! I wish everyone understood this. The CCI tells the
real story of commodities. And just witnessing the biggest upleg of
this bull by far followed by the biggest correction by far should be
exciting, not scary. As a secular bull matures, an ever-growing
pool of capital gets interested in it. As more capital trades a
maturing bull, volatility ramps up. Bigger upleg gains and bigger
correction losses are signs of broader interest. And volatility
should continue to increase on balance from here.

Given the massive
and decisive bounce in the CCI in the past week, odds are fear has
already peaked and the sixth major correction has fully run its
course. If this proves correct, then we are right at one of the
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The bottom line is
commodities move in cycles, just like any other secular bull.
Uplegs are followed by corrections to rebalance sentiment
periodically. And the bigger an upleg, the bigger the subsequent
correction is likely to be. While we just weathered the biggest
correction of this entire bull, traders shouldn’t be too surprised
since the biggest upleg came before it. In fact, this is very
exciting!

The CCI’s first
big upleg arrived because of the initial vanguard of mainstream
involvement, the hedge funds getting interested. More capital
chasing commodities means more volatility and bigger uplegs in the
future. The higher commodities go, the more mainstream investors
will get interested. This should ultimately culminate in a popular
mania like the late 1970s when average investors rush to buy and
temporarily drive prices stratospheric.